GT Advanced Technologies: Ignore The Short-Term Fluctuations - Focus On The Long-Term

Aug.10.14 | About: GT Advanced (GTATQ)

Summary

The full year outlook has played a key role in reversing the trend in the stock price over the last few days.

Sapphire remains the largest contributor towards revenues for the company but GTAT is not a one trick pony.

Hyperion and Merlin will be equally important for the company to achieve its 2016 guidance of $1.50 in EPS.

GT Advanced Technologies (GTAT) took a steep fall at the start of July and the stock went below $14 from over $19.50 in a space of a month. However, at the end of July, the stock started to climb back up and the momentum has continued as the company reported its earnings. The stock has recorded a gain of over 185% over the last twelve months on the back of some very interesting developments, which we have covered in our previous articles. It is normal for a stock to show volatility that has recorded such a large gain over the last twelve months - volatility will still persist for GTAT as it is a growth stock and there is still a long way to go for the company before we see a stable pattern in the stock price.

The fall in the stock price was mainly caused by the rumors that Apple (NASDAQ:AAPL) might not be using sapphire in its upcoming devices as GTAT was facing some production issues - these took a heavy toll on the stock price and we saw a steep decline. The trend in the stock price changed when the company came out with second quarter results - although GTAT missed the earnings estimates, strong full year outlook gave support to the stock price and it started to rise.

Results were not impressive for the second quarter as the company missed EPS by two cents and revenues estimates by $6.4 million - the market was expecting GTAT to report 14 cents in net losses and $64.4 million in revenues - GTAT reported 16 cents in net loss and $58 million in revenues for the second quarter.

Click to enlarge

Source: Earnings Release

Sapphire continues to be the largest contributor towards the revenues with $44.1 million [76%] and photovoltaic segments stands at the second spot with $11 million, while Polysilicon contributed only $2.9 million - looking at the revenue mix; it is not a surprise how the stock price takes swings at the news about the sapphire segment of the company.

The most important part of the earnings release, however, was the full year outlook - GTAT gave a strong outlook which has caused a strong rally over the last two-three days. The company raised its full year EPS target from $0.2-0.18 to $0.12-0.18 - the upper end of the guidance remains the same; however, the change in the lower end indicates that the company is confident in achieving better than expected results.

Recently, too much focus has been put on the sapphire segment of the company, which I believe is unfair taking into account the long-term prospects of the PV segment. Tom Gutierrez, President & CEO, said this:

"The response from partners and potential customers for Merlin™ and Hyperion™, two of our high growth opportunities, has been very strong. We remain confident in our ability to achieve our 2016 non-GAAP earnings per share target of at or above $1.50. This is driven by the expected contributions of Merlin, Hyperion and our other new technology platforms, along with the growth of our sapphire, Polysilicon and PV businesses,"

Although sapphire is going to be a key segment for the company; however, it will not be the only growth area for GTAT - Hyperion and Merlin will be equally important going forward - I have explained the importance of both these segments in two separate pieces here and here. Solar energy segment is looking at ways to bring down the production costs of the solar panels in order to increase the viability of clean energy - both these technologies will go a long way in solving a key issue in the sector - this is the main reason GTAT is seeing strong interest in both these products as manufacturers are looking to decrease costs of solar panels. Furthermore, the new systems in the PV segment are also getting strong interest and one example is GTAT's recent agreement in the Middle East.

One of the major reasons behind GTAT's confidence in $1.50 in EPS by 2016 is the strong interest in Hyperion - this technology will allow the integrated companies to save about 20% in production costs - this is a major cost saving and the major integrated companies will decide to shift as the payback period will be short and the NPV will be substantial - in other words it will be a no-brainer. Based on GTAT's 2016 $1.50 EPS, forward P/E ratio comes out to be around 10, which is extremely attractive for a growth stock. At the moment, however, sapphire remains the largest component of the revenue mix as the future order backlog also contains a major portion in sapphire equipment orders. It is still not clear how much sapphire GTAT will be selling out of its Arizona facility and how much Apple will be using for the new devices - nonetheless, the full year guidance shows that the management is increasingly confident about the sales from the Arizona facility as it was clearly mentioned that the production ramp-up at Arizona facility will be a key reason for GTAT in achieving full year results - this should reduce doubt about the prospects of the sapphire business.

Bottom Line

GT Advanced Technologies remains a solid long-term pick, and we believe the investors should not be spooked by the short-term price fluctuations. Almost all the segments of the company have strong growth potential - if these segments meet the potential; GTAT will be easily trading over $30 in 12-18 months time. However, patience is key here - ignore the volatility and leave short-term trading to expert traders - long-term investors should just sit back and see their investment appreciate as we believe it will prove to be one of the best investments over the next 12-18 months.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.